Climate change risks in property transactions

Climate change is starting to affect our lives to a greater extent than experienced before. Extreme weather events such as floods, droughts and heatwaves are becoming a frequent occurrence. These events are also set to impact commercial property transactions which is becoming an issue gaining importance when considering entering a property transaction.

This evolving landscape has prompted the Law Society to issue a new practice note dealing specifically with this subject titled ‘Climate change and property’ published on 6^th June 2025. This practice note follows up on a previous note on climate change published in 2023.

Types of climate risks

Most of us when involved in property transactions would have been made aware of the environmental risks such as flooding, ground stability or coastal erosion. The Law Society guidance sets out three categories of climate related risks as follows:

• physical risks
• transition risks
• liability or legal risks

Physical risks are perhaps the easiest to identify with their impact on property transactions being fairly self-evident. Examples of physical risks of climate change include:

• Flooding that could be caused by river, surface or groundwater;
• Ground stability and subsidence caused by ground swelling and shrinking;
• Coastal erosion caused by storms and resulting in the significant loss of land;
• Physical damage to buildings caused by extreme weather events such storms

The effects of physical risks on the property can be far reaching; they can affect the use and enjoyment of the property, its market value or even sell-ability to include availability of financing or building insurance. To fully assess the impact of physical risks, the importance of obtaining professional building surveys and suitable property searches cannot be overstated. There are many searches that deal with climate change and environmental risks in various degrees and if any risks are identified a further specialist input can be sought.

Transition risks cover those risks stemming from changes to policy, legislation and market introduced by governments or specific industries bodies aimed at supporting transition to a net zero economy. Although these changes are driven by the need for positive action, they may have some adverse effects on property transactions through increased costs, reduced property marketability or increased regulatory burdens. Examples of transition risks could include changes to:

• Minimum Energy Efficiency Standard Regulations requiring a higher EPC rating for a rented property;
• The Building Regulations imposing additional obligations to meet energy efficiency targets;
• Climate reporting policies introducing mandatory carbon reporting or data sharing

Liability or legal risks refer to the obligations or liabilities that could arise from the physical or transition risks set out above. Examples could include:

• Increased costs in refurbishing projects if the Building Regulations require further insulation to meet the improved energy efficiency standards;
• Landlords having to incur significant costs in upgrading their property portfolio if the minimum EPC thresholds are raised;
• Property development becoming more expensive due to additional planning conditions aimed to address future flood risks;
• Inability to exercise the party’s right of access due to physical damage to the property or access being restricted by weather events such as flood;
• Additional costs incurred in meeting the increased administrative burdens involved in additional reporting/data sharing obligations

How will the climate risks affect my property transaction?

Perhaps stating the obvious, not all climate risks will affect every property transaction to the same extent. Different considerations will need to be taken into account when entering a short term lease and different when considering a purchase of land for development. Here are some common examples of factors advisable to consider.

When taking a commercial lease, a tenant would be well advised to consider the following:

• Risk of the EPC thresholds being raised – will a tenant or a landlord be responsible for the works needed to meet the new required rating, with this being particularly relevant for any properties with current low rating. Issues such as responsibility for costs and rights of access must be considered.
• Increased insurance premium – in most commercial leases, a tenant is responsible for the insurance premium costs and as such it is advisable to consider the policy terms and whether any premiums could become expensive due to increased risk of flooding due to the particular property location;
• Repairing obligations – which party would be responsible for any physical damage and whether this would be covered by the insurance.
• ‘Green provisions’ – these are becoming increasingly common. From a tenant perspective it is critical that any additional reporting or obligations to reduce emissions can be fulfilled (for more detail please see our previous article on this topic.

When purchasing a freehold property to be let out or developed, the aspects to consider include the following:

• Repairing obligations – as above which party would be responsible for any physical damage, but also, a landlord would want to strike the right balance in respect of a tenant’s rights to rent suspension or termination in the event of a property being damaged by a weather event;
• Service charge provisions – the lease would have to be clear on which costs of property maintenance or improvements can be re-charged to a tenant and which may have to be borne by a landlord;
• Refinancing – when considering charging the property, a landlord would want to know whether the property will remain a good security for most lenders and its value would not be affected by future climate events. Landlords would also want to ensure that availability of the insurance is not restricted or premiums are not too expensive as a suitable cover would be required by any prospective lender;
• Planning permission – any property development projects can take years to complete and as such forward planning is crucially important. Specialist searches and surveys as well as factoring in future regulatory changes would be critical to ensuring that the development is successfully completed and financially viable.

As can be seen from the above summary, climate risks can affect any property transaction in some cases to such an extent as to make a transaction not viable. In all cases, the importance of obtaining appropriate property searches and professional surveys cannot be overstated. Once any risks are identified, a full legal advice on their impact can be given including seeking further input from appropriate professionals such as surveyors or environmental specialists to enable a party to make a fully informed decision as to whether to proceed with the transaction.

If you need assistance,  get in touch with our Commercial Property solicitors.